Technology

Despite Caution in Semiconductors, SunTrust Has 5 Chip Stocks to Buy for 2018

Lee Jackson

Published: January 8, 2018 8:50 am

Last Updated: January 12, 2020 4:44 am

After two years of incredible growth and returns for the semiconductor industries, even the most bullish of the analysts on Wall Street are becoming more cautious on the segment for 2018, and with good reason. The PHLX Semiconductor Sector (SOX) index was up a staggering 38.3% in 2017, and that followed a massive double-digit rise in 2016. While demand will continue, and the cyclicality that was once inherent has tapered over the years, the bottom line is that the stocks are expensive.

A new research report from the analysts at SunTrust Robinson Humphrey notes that 2017 was indeed an awesome year and that fourth-quarter earnings should reflect 17% industry growth, which is the first double-digit growth year since 2010. However, the firm is tapping the brakes on 2018, and this here’s why:

Despite a strong structural backdrop (the industrialization of semis) and benign (or perhaps better) demand trends today, we believe several factors will challenge a coordinated outperformance of semi fundamentals and stocks in 2018. We cannot forget that the industry posted negative growth in 6 out of the last 17 years, and was shrinking as recently as mid-2015 to mid-2016, despite global GDP growth of ~2.9% during that time.

The analysts are still positive on five top companies, two of which are favorites, and all still make good additions to aggressive growth portfolios.

Analog Devices

This stock spiked recently and has come back into a good buy range. Analog Devices Inc. (NASDAQ: ADI) is a leader in the design, manufacture and marketing of analog, mixed-signal and digital signal processing integrated circuits for use in industrial, automotive, consumer and communication markets worldwide. It offers signal processing products that convert, condition and process real-world phenomena, such as temperature, pressure, sound, light, speed and motion, into electrical signals.

Last year the company introduced a highly integrated polyphase analog front end (AFE) with power quality analysis designed to help extend the health and life of industrial equipment while saving developers significant time and cost over custom solutions. Achieving extremely accurate, high-performance power quality monitoring typically requires customized development, which can be expensive and time-consuming.

The analysts believe that the Linear Technology acquisition, which closed earlier this year, is a huge positive. In addition, many on Wall Street expect that corporate management ultimately will exceed its $150 million of targeted synergies.

Analog Devices investors receive a 2.11% dividend. The SunTrust price target on the shares is $105. The Wall Street consensus target is $98.25. The stock closed last Friday at $91.67.

Broadcom

This company has been on fire over the past year and remains a top pick at SunTrust and across Wall Street. Broadcom Ltd. (NASDAQ: AVGO) has an extensive semiconductor product portfolio that addresses applications within the wired infrastructure, wireless communications, enterprise storage and industrial end markets.

Applications for Broadcom’s products in its end markets include data center networking, home connectivity, broadband access, telecommunications equipment, smartphones and base stations, data center servers and storage, factory automation, power generation and alternative energy systems and displays.

Top Wall Street analysts like the leadership in the mobile, data center and broadband markets, and especially in the radio frequency (RF) arena. Many on Wall Street see a cyclical rebound in industrial and communications demand.

Broadcom has big exposure to the cloud through its Enterprise Storage segment (HDD controllers) and general data center build-outs in its Wired Infrastructure segment. Within HDDs, enterprise units are 15% to 20% of the business on a unit basis and 20% to 30% on a revenue/profit basis.

Broadcom investors are paid a 2.57% dividend. SunTrust has a $300 price target, and the consensus target is $315.69. Shares closed Friday at $271.62.

Monolithic Power Systems

This off-the-radar play could be offering continued upside potential. Monolithic Power Systems Inc. (NASDAQ: MPWR) designs, develops and markets integrated power semiconductor solutions and power delivery architectures for consumer, industrial, computing and storage, and communications market segments. It offers direct current (DC) to DC converter integrated circuits (ICs) that are used to convert and control voltages of various electronic systems, such as portable electronic devices, wireless LAN access points, computers, monitors, automobiles and medical equipment.

The company also provides lighting control ICs for backlighting that are used in systems, which provide the light source for LCD panels in notebook computers, monitors, car navigation systems and televisions, as well as for general illumination applications. In addition, it offers alternating current (AC)/DC offline solutions for lighting illumination applications and AC/DC power conversion solutions for various end products that plug into a wall outlet.

Shareholders receive just 0.68% dividend. The $135 SunTrust price objective compares with the consensus target of $124.38. The shares ended last week at $120.07.

NVIDIA

This top chip stock has reported very strong earnings, and it was the top performing stock in the S&P 500 last year. NVIDIA Corp. (NASDAQ: NVDA) is one of the leaders when it comes to supplying graphics processing technology for the 3D graphics market, including desktop graphics processors and gaming consoles.

NVIDIA is also moving into visual computing chips for cars, mobile devices and supercomputers. The company has been able to use its ability to leverage past investments, with a more controlled spending structure ahead on unified, which enables strong cash flow that is allowing a focus on capital return, which is currently estimated to be $1 billion next year.

Top Wall Street analysts feel the stock is maturing to a platform company from a pure chip company, and Jefferies sees the stock continuing to benefit from four secular trends: virtual reality, PC gaming, chips in the automobile industry and graphic processing units (GPUs) in the cloud.

The company posted gigantic third-quarter results that well exceeded Wall Street estimates, with much of the gains directly from the firm’s huge data center and AI business. Growth across all its platforms contributed to record revenue for the quarter, which was up 32% from a year earlier.

Investors are paid a small 0.28% dividend. SunTrust has set its price target at $250. The posted consensus target is just $211.63, but shares closed most recently at $215.40.

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TTM Technologies

This stock could have very solid upside potential for 2018. TTM Technologies Inc. (NASDAQ: TTMI) is a manufacturer of printed circuit board (PCB) products and is focused on technologically advanced PCBs and electro-mechanical solutions. As of January 2, 2017, the company operated a total of 25 specialized facilities in North America and China, including 13 domestic PCB fabrication plants and a facility that provides follow-on value-added services primarily for one of the PCB fabrication plants.

All components of an electronic apparatus are mounted on its PCB, which provides electrical connections between the components (such as chips and resistors) using (mostly) copper traces and pads to which the components can be soldered. TTM Technologies offers a range of PCB products, including conventional PCBs, high-density interconnect PCBs, flexible PCBs, rigid-flex PCBs, custom assemblies and system integration and integrated circuits (IC) substrates.

The SunTrust price target is $20. The consensus target is in line at $20.25, and the stock closed on Friday at $16.32.

The SunTrust concern for 2018 is warranted as valuations are very high, and the stocks as indicated by the numbers have had huge runs. Investors looking to buy positions may want to scale capital in over a wide period and hope that the market and the sector backs up some.